State banks sell dollars and tighten offshore liquidity to curb yuan’s slide
SHANGHAI/BEIJING: In a bid to stabilize its currency, China’s major state-owned banks intervened on Monday by restricting offshore yuan liquidity and actively selling U.S. dollars in onshore markets, according to four sources familiar with the matter.
The efforts come as China’s A shares suffered their steepest one-day drop since April 2022, with the Shanghai Composite Index plunging 2.7%. The sharp decline in equities exacerbated concerns about the country’s economic slowdown and led to heightened volatility in the yuan.
“It’s a clear policy signal to stabilize the yuan and counter the negative market sentiment on equities,” explained Gary Ng, Senior Economist for Asia Pacific at Natixis.
Market Intervention Explained
The interventions were twofold:
Tightening Offshore Liquidity:
Offshore yuan tomorrow-next forwards surged to a two-month high of 4.25 points late Monday, signaling reduced yuan availability in offshore markets.
State banks reportedly scaled back yuan lending to peers in the offshore market, raising borrowing costs and deterring speculative short-selling of the currency.
Selling U.S. Dollars Onshore:
State banks aggressively sold U.S. dollars in the onshore spot market to defend the yuan from breaching the key level of 7.2 per dollar.
While state banks are known to act on behalf of China’s central bank in such instances, they may also trade independently or execute orders for clients.
Investor Sentiment and Market Reaction
Investor confidence in Chinese markets has been rattled by signals of an economic slowdown. So far this year, overseas funds have sold approximately $1.6 billion worth of Chinese equities.
The onshore yuan last traded at 7.1963 per dollar, while its offshore counterpart was at 7.2047, marking a year-to-date decline of nearly 1.4%.
Broader Implications
The coordinated actions reflect Beijing’s determination to manage currency stability amidst declining equity markets and a weakening economy. Analysts will now watch closely for further policy signals as China navigates challenging market conditions.
